Recovery calling?

A CANNY investor who bought shares in mobile phone giant Vodafone at the beginning of 1998 and sold at the peak of tech mania two years later, would have seen his £1,000 grow to £3,950.

Unfortunately most of us failed to predict that the world was set to plunge into recession. Economic woes coupled with fears that telecoms technology may not be the massive money-spinner once thought drove the biggest shares in the sector back to 1998 levels.

However, since the stock market collapse following 11 September, mobile phone companies have begun a recovery. In fact, the sector as a whole has bounced back nearly 30% compared to 17% for the whole UK stock market. And Vodafone has leapt more than 40%.

Nick Cardani, a telecoms analyst at stockbroker Gerrard, says: 'The issues that have hung over Vodafone in the past are going and the stock is gaining momentum. It is probably reaching full value based on fundamental analysis but it could keep benefiting from the change in sentiment.'

An array of short-term factors will decide where theses stocks go from here but wise investors will evaluate each on its long-term prospects and rather than trying to make a quick buck.

There are three stocks that UK investors can easily invest in to benefit from a continuing boom in mobile phone use: Vodafone, the UK's largest company; mm02, the former BT Wireless spun-off from British Telecom; and Orange, originally a UK company but bought by France Telecom and floated on the Paris stock market with a dual-listing in London.

It is essential first to understand the turbulent spell the sector has endured. As tech fever gripped the market in 1999, experts talked of the billions of pounds that could be squeezed out of mobile customers. And analysts salivated over the prospect of the even bigger revenues that would be made from 'third generation' networks, where shops would automatically text its customers walking past to tell of them of a new sale and moving picture adverts could be transmitted to a captive audience of millions. It was irresistible to brokers and they told their clients to buy shares immediately.

They had, however, overlooked a costly policy by network operators to heavily subsidise new phones in the scramble to attract the most customers. That ate into profits. But the killer blow came with the auction for 3G licences. Hopes for the sector were still on a high, persuading firms to shell out a total of £22bn in the UK alone. The ability to recoup this massive outlay has since been the black cloud hanging over the sector.

In essence, some analysts say an investment in any of these companies is a punt on whether 3G will be a success.

So if you are happy with that risk, which do you pick? All three are volatile. Vodafone's performance is mentioned above; Orange, re-floated in February, has endured a roller-coaster ride of a 746p high and 373p low. It now sits marginally higher than its 603p launch price. Mm02 floated at 74p in October and has since bounced between 68p and 96p. It is currently 91p.

Most brokers plump for Vodafone. Since mid-September, 14 brokers have commented on the stock, according to specialist investment website Hemscott. They all say to buy shares. But these bullish comments come despite Vodafone announcing recent losses of £8.5bn - the biggest loss in British corporate history. There was, however a near 30% hike in turnover. And that is the Vodafone story. It is growing at an exceptional rate and dominates in most of the 28 countries in which it operates.

Orange, on the other hand, operates directly in 20 countries and Mm02 is present in just four.

Analysts believe that mm02 is so small that it may be bought out - that could be a driver for the share price. But if a deal fails to materialise the stock could underperform. A further bull point is that parent BT Group took on most of the debt from the 3G licences, leaving mm02 with a very manageable £500m. Some investment banks have tipped the stock but Goldman Sachs gives it a fair price of 70p.

Orange keeps a solid fan base. Janette Colloby, a senior analyst at financial group Hargreaves Lansdown, says: 'Vodafone is the obvious choice, a market leader with strong revenue growth, but I personally prefer Orange. It is ahead of the rest with value-added services, like OrangeWorld that will allow you to switch your oven on from the gym using your phone, and so on.

'Orange is generally more innovative than the others. But admittedly Orange is a higher risk investment than Vodafone.'

Orange's Paris listing is also worth bearing in mind. The shares are quoted in euros and converted into pounds for UK shareholders, who must use nominee accounts for their holdings. That leaves a currency risk. If the euro slumps against the pound so will your the real value of your shares even if the Paris-listed shares don't move. It is an added to risk to consider.